Consider this scenario: for a while you have been occasionally losing employees to competitors, and have seen some signs of a loss of some business to former employees. More importantly, you believe that some of the employees have used, in their new employment, information that you consider confidential to contact customers or create and price products. Your lawyer or accountant suggests that you consider non-competition agreements for either all your employees or at least the employees in key sales, product development and managerial roles.
You then get a form of non-competition agreement, which prohibits competitive employment for two years after termination for any reason and has no geographic restriction. You present it to the "key" employees, telling them that signing this is a term and condition of further employment. Most sign the agreement, but one employee, a long-time employee in the product development group, refuses, saying that the agreement is grossly overbroad, that she has no contact with clients, and that the agreement would make it impossible for her to seek alternative employment in the entire New England region. You refuse to negotiate — thinking of the other ten or twelve employees who might then want to renegotiate — and reluctantly terminate her employment.
What result? In at least one state you may have wrongfully terminated the employee and set yourself up for a civil action for damages. Recently, a New Jersey appellate court held that an employee, who was terminated for refusing to sign an overbroad non-competition agreement, had stated a valid claim for wrongful termination. The court's reasoning was simply this: (1) An at-will employee states a valid claim for wrongful termination only if he or she does something that public policy encourages, or refuses to do something that public policy would not condone, and is fired in retaliation for it; (2) Overbroad non-competition agreements violate public policy; and (3) An employee's refusal to sign an agreement that violates public policy, and termination due to that refusal, can constitute a termination in violation of the clear mandate of state public policy.
Under the law of many states, including New Hampshire, this sort of reasoning is hardly far-fetched, and has serious ramifications for employers and employees. In New Hampshire, courts recognize the so-called public policy exception to the "at-will" employment rule. Under this exception, an employee may not be terminated in bad faith and in retaliation for doing an act public policy would encourage or refusing to do an act that public policy would condemn. In New Hampshire, non-competition agreements violate public policy if the agreement is unreasonable and overbroad under the circumstances. An employee's refusal to execute a broad, unreasonable non-competition agreement, and resulting termination, could result in a claim of wrongful termination under the law.
Employers may safely assume that this new law, if sustained on appeal by the New Jersey Supreme Court, will migrate north. The enforceability and "reasonableness" of such agreements is notoriously difficult to predict. Employers may find themselves unwittingly having violated "public policy."
The appropriate response is restraint in advance. As contracts in restraint of trade, non-competition agreements are disfavored under the law, and are only enforceable if reasonable under the circumstances. Employers should look hard at the scope of the non-compete agreements they ask employees to sign, and ensure that a clear and unambiguous good faith argument can be made that the covenant not to compete protects legitimate interests of the Company, and does not simply curtail legitimate competition or otherwise impose a truly disproportionate hardship on an employee's future prospects. Employers must strike a balance between protecting legitimate interests in company goodwill, trade secrets and confidential information, on the one hand, and ensuring that such protection is narrowly tailored on the other hand. Such a balance serves two consistent masters: protecting company assets and protecting against a lawsuit due to overreaching. An attorney who knows you, and knows your business and its intellectual capital risks can help forge the appropriate balance.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
|
